Question

Congratulations! You have been appointed an economic policy adviser to the U.S. You are told that the economy is significantly underutilizing its available resources and that the following will happen the next year: World recession will continue and the prices of oil will increase significantly. These two events are explained by the following factors:

Multiple Choice

• Lower domestic income and higher prices of input.

• Higher foreign income and lower prices of input.

• Lower foreing income and higher prices of inputs.

• Expectations of lower income in the future and lower productivity.

Answer 1

Expectations of lower income in the future and lower productivity.
Recession or under utilization of resources would imply lower income than full employment or potential level. Increase in oil prices will increase the price of inputs and therefore reduce productivity. Since both these events are in future, these are expectations